My most recent books are the Leader's Guide to Radical Management (2010), The Leader's Guide to Storytelling (2nd ed, 2011) and The Secret Language of Leadership (2007). I consult with organizations around the world on leadership, innovation, management and business narrative. At the World Bank, I held many management positions, including director of knowledge management (1996-2000). I am currently a director of the Scrum Alliance, an Amazon Affiliate and a fellow of the Lean Software Society. You can follow me on Twitter at @stevedenning. My website is at www.stevedenning.com.

What's Your Mental Model Of Innovation?

If a factory is torn down but the rationality which produced it is left standing, then that rationality will simply produce another factory.

Robert Pirsig: Zen and the Art of Motorcycle Maintenance

“We owe our existence to innovation,” writes Gary Hamel in his wonderful new book, What Matters Now. “We owe our prosperity to innovation… We owe our happiness to innovation… We owe our future to innovation… Innovation isn’t a fad—it’s the real deal, the only deal. Our future no less than our past depends on innovation.”

The book is not only emphatic on the importance of innovation. One of its many virtues is that it sheds light on different mental models that are in play in innovation. Making these models explicit can be helpful in understanding the issues at stake.

Four mental models

Mental Model #1: Business as usual: As Hamel points out, traditional management is uncongenial to innovation. “Most of our management rituals were invented a long time ago to promote discipline, control alignment and predictability—all laudable goals.” But the resulting processes are fundamentally at odds with innovation. “In most organizations,” Hamel writes, “innovation happens ‘despite the system’ rather than because of it. That’s a problem because innovation is the only sustainable strategy for creating long-term value.”

Mental Model #2: Fire all the managers: A second model is to fire all of the managers and let those doing the work (“colleagues” rather than “employees”) get things done through self-management, thus relieving them from the dead hand of traditional management.

The book provides an illuminating case study of Morning Star as an example of this approach. Morning Star is the world’s largest tomato processor. It has 400 employees and generates some $700 million in revenues. As a private organization, it has experienced robust growth and profitability. It has 20 independent business units, each with its own profit and loss accounting. Each colleague is a member of a business unit team.

Employees are encouraged to suggest improvements in any area of the business, but the business continues to adopt a conventional bottom line (make money for shareholders) and all work is subjected to conventional financial analysis. Efficiency is part of everyone’s mission. Colleagues are free to spend the company’s money, but they must construct a solid business case for doing so, including ROI and NPV calculations.

Mental Model #3: 20 percent free time: In this model, the company runs on two tracks. Most of the company’s operations (say, 80 percent) will run on conventional management principles, with traditional management controls and performance criteria such as ROI and maximizing shareholder value.

Another part of the company’s activities (say, 20 percent) are “exempted” from these controls and in this time, employees are “free” to explore experiments as they see fit. In the approach, it is hoped that the successful experiments from the experimental track will eventually find their way into the conventional business and employees will be more motivated, by having the liberty to pursue their dreams. Google [GOOG] was cited as an example of this model in Hamel’s 2007 classic, The Future of Management.

Mental Model #4: Continuous innovation: What Matters Now cites Apple as an exemplar of a firm where the entire organization is devoted to continuous innovation and finding new ways of delighting customers. The new bottom line of this kind of organization is whether the customer is delighted (e.g. Net Promoter Score). Conventional financial measures such as maximizing shareholder value are subordinated to the new bottom line. Profit is a result, not a goal. Experimentation and innovation become an integral part of everything the organization does. Amazon and Salesforce are also cited.

Evaluating the four mental models

Which of these mental models is the more promising?

#1: Business as usual: In traditional management or “management 1.0″, innovation is dependent on the brilliance of individual managers. As Hamel notes, the track record is dismal. The most frightening thing is the lethal phenomenon of disruptive innovation in which death doesn’t come as a result of “bad” management. Instead, the disasters have occurred in industry after industry because managers were following the dictates of “good” traditional management: maximizing shareholder value, ratios like ROI and the like.

#2: Fire all the managers: The account of the activities of firms such as Morning Star that have “fired all the managers” leaves it unclear as to how far it leads to more successful innovation. Although all associates are encouraged to suggest improvements, suggestions are submitted to the same ROI and NPV analysis as in traditional management. One has to wonder whether there will not be same result. Within such an analytical framework, milking the existing cash cow will almost always appear more attractive than bold innovation in a new field. For instance, there is no sign of any capacity at Morning Start to undertake disruptive innovation.

The question thus remains: if the employees are driven by the same traditional management thinking (same bottom line and financial controls such as ROI) as the managers who have been “fired”, is there any basis for thinking there will be any different result in terms of experimentation and innovation? It may not matter who applies the thinking embodied in the decision-making–whether managers or employees—if the thinking remains the same. “Thus “firing all the managers” may be a desirable or even necessary step in promoting innovation, but by itself, it may not be enough.

#3: 20 percent free time: There are also questions as to how far mental model #3 will lead to a significant improvement in terms of innovation over the status quo. Anecdotal evidence from ex-Google employees suggests that the “20 percent free time” at Google is more myth than reality: it seems that most of the supposed “free time” for employees is consumed by under-programming of the “regular” work.

The jury is still out as to whether the approach can generate disruptive innovation. Thus, for all the talk about innovative ideas coming out of Google, 96 percent of its revenues still come from the single original business model (ads based on search), and even that business is slowing, as explained in an insightful article by Eric Jackson on Forbes. Commercially, Google remains a one-trick pony. It has yet to show any significant capacity to disrupt itself–the most important test of innovative capacity.

#4: Continuous innovation as the bottom line: By contrast, the prominent exemplars of #4–Apple, Amazon and Salesforce–have shifted the bottom line and the purpose of the firm so that the whole organization focuses on innovation. Thus experimentation and innovation become an integral part of 100% of what the company does, not just 20%. As a result, experimentation is harnessed for the commercial purposes of the firm. Companies with this mental model have shown a consistent ability to innovate and to disrupt their own businesses with innovation.

Thus what is striking about mental model #4 is that it offers the promise of defeating the otherwise lethal disease of disruptive innovation. As James Allworth has written in the HBR blog, once you make the creation of value for customers the top priority, “the fear of cannibalization or disruption of one’s self just melts away”.

Happily the approach is not only more innovative: it tends to make more money. The latter point is important to keep in mind. For all the hype about innovation, unless it ends up making more money for the firm, ultimately it isn’t likely to flourish. Making money isn’t the goal, but the result has to be there for sustainability.

The necessary change is deep and broad

Achieving continuous innovation, Hamel stresses, “lies outside the performance envelope of today’s bureaucracy-infused management practices.” It will require major changes in mind and heart. It will need, Hamel writes, new values, new processes for innovation, a greater adaptability, the infusion of passion in the workplace and a new belief system or ideology.

Hamel is thus not alone in thinking that in firms that master the future, everything will be different. Hamel calls it “management 2.0”. John Hagel and John Seely Brown and Lang Davison call it “The Power of Pull“. Ranjay Gulati calls “reorganizing for resilience.” I have called it radical management. Whatever you want to call it, it is certainly different from what is called management in most large organizations today.

The stakes are high. Those firms that opt not to change won’t survive. As What Matters Now shows, the choice is clear: change or die.

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Does “continuous innovation” really just mean “continuous improvement”? You can have improvement without innovation.

IMHO, 20% innovation time (model #3) has more focus on innovation. It promotes multiple experiments in parallel. It’s more of a fail often fail fast approach – opening the business up to as many “positive black swans” as possible.

I think that 20% time also has potential to break down silos – if people pair up on experiments with someone from another team/discipline.

Thanks for your comment. “Continuous improvement” has come to be associated with incremental innovation in small steps. “Continuous innovation” can include disruptive innovation.

I see several problems with model #3. First: why is 80% of the firm’s activities not improving? That seems like a heavy anchor to carry.

Second, the firm’s real priority is the 80% so, as we hear from ex Google folks, the 20% tends to get swallowed up by the 80%. So it’s 20% in theory, but much less, if anything, in practice.

Third, the 20% may generate cross-silo innovations, but the issue is getting them accepted as corporate priorities. Google thus has lots of innovation, but still 96% of revenues come from the original business–ads on search.

I totally agree, 80% of the firm’s activities have to be improving. And model #4 is the best way to achieve that.

But model #3 compliments it. The 80% is for the highest priority experiments, those with the strongest business cases. The 20% is for “black swan” experiments, avenues that will probably lead to nothing but might just (unpredictably) lead to a killer product.

To me, trying to innovate has a high chance of zero return. 100% innovation is risky. Like you say, Google has lots of innovation but it hasn’t transformed revenue. Google’s innovation *has* reduced it’s risk of being outflanked by competitors. Innovation improves exposure to risk/opportunity but there’s no guarantee of a blockbuster success.

I agree that model #4 can include disruptive innovation. (Disruptive innovation can also occur by “luck” alone e.g. penicillin). IMHO, disruptive innovation is made more likely by combining models #3 and #4.

While Apple has undoubtedly been extremely successful over the last few years, the innovation process within Apple remains a blackbox. Further, if we look at Apple over a 30-year period rather than just the last decade, its performance has been much more patchy. While Steve Jobs’ brilliance was unquestionable, what can oher companies do to emulate Apple (besides trying to clone Steve Jobs, and it’s too late for that now)? And, in my view, too little credit is given to the efficient supply chain management system set up by Tim Cook and others at Apple that has allowed Apple to capitalise on its product innovations.

#1 and #2, fire the managers and be prepared to the reaction. Employees usually don’t take the changes very well. Read the book from morning star foundation and you will see that risks are high. I know by experience, a mess. Not everyone is prepared for self-management and surprisingly many don’t even want it.

#3 Countless companies are not achieving anything with a lot of innovation and absolutely no discipline. What we are seeing is the new generation with very low productivity while Chinese companies with no innovation and a lot of discipline are cruising the market

#4 To make a new product ‘hit’ takes a tremendous effort with lots of unsuccessful tries. The CEO is still the biggest motor for company innovation. Companies with great CEOs are still the most innovative (Jobs, Bezzos, Dell, Zuckerberg). Companies owned by pension funds are probably the least innovative.

Go where no one else will go.. take your innovation and lead… nothing will change without innovation, to be inside a box is to be warm and comfortable… boxes have four corners that will polarize your thinking.. boxes have quadrants that will not allow them to include an encompassing circle… innovate…. place the circle outside the box… from there your vision at any point on the curve will allow you to see every point inside the circle… including the area of importance that is not inclusive in the square…